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Multi asset update – US equities back to neutral after early sprint

Maya Bhandari
By MAYA BHANDARI 21.02.2023

In this article:

    Following a strong new-year rally in US equities, we have taken profits on the long position we held in the asset class since late October. This takes our stance back to neutral in our multi-asset portfolios, which still have equities generally at ‘dislike’. The adjustment reflects trends in both valuations and fundamentals.  

    In October, forward equity valuations looked relatively attractive, particularly in the US tech segment, which had undergone an intense devaluation. Market sentiment and technicals, by contrast, looked favourable, as captured in our market temperature framework.

    The outlook is now less positive. The S&P500 index has bounced 8% higher in the past month alone. Valuations are higher, with the US market again one of the more mispriced markets from a longer-term perspective (only Europe is more richly valued). The lights from our market temperature framework are flashing amber.

    Fundamentals also appear darker. Late last year, analyst estimates for forward earnings by S&P 500 stocks had fallen meaningfully – by the most since 2009 aside from the pandemic period, and to the lowest growth expectations at a year-end on record. The latest earnings reports point to growing margin pressures that could persist for longer. Earnings per share estimates have continued to decline.

    With investor uncertainty over US monetary and fiscal policy rising again, we felt taking profits on this tactical position made sense.

    Europe dearer, China and EM favoured

    European stocks appear more expensive than other markets, looking at the growing gap between the price/earnings ratio, earnings per share, and fair value. Much of the earnings optimism has been concentrated in the energy sector, but companies have toned down their outlooks, so valuations bear close watching. On market temperature, we believe market sentiment is headed for a pullback.

    By contrast, Chinese and emerging market equities look fairly priced to us. We believe they offer interesting diversification opportunities given their less discernible links with the performance of other asset classes.

    Asset class overview

    Strong dislikeDislikeNeutralFavourStrongly favour
    Risk appetiteX
    Asset allocationEquities
    Real estate
    Government bonds
    Equity regionsEurope ex-UKUS
    EM ex-Asia
    Emerging Asia
    Equity style/sizeEU large cap
    EU small cap
    US large cap
    US small cap
    Sovereign bondsUS
    EM local
    CreditEmerging market debt
    US IG
    US high-yield
    EU HY
    EU investment-grade
    Base metals
    Precious metals
    EM currencies
    JPY vs. EUR

    Twelve-month, risk-adjusted view; 21 February 2023; source: BNP Paribas Asset Management


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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